How We “Make In India”: Labour Laws In Our Country

Labour laws on paper, the way they really work and how we can bridge that gap.

WrittenBy:Vinay Aravind
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With the Prime Minister launching the “Make in India” initiative, every talk show expert worth his salt will tell you that labour law reform is the need of the hour; the magic bullet to achieve economic prosperity. While labour laws in India desperately need an overhaul, the media, and these “experts”, would have you believe that it is simply a question of lessening or removing regulations to make it easier for employers to conduct their business. The truth is considerably more complex than that.

It is an inescapable fact that there are far too many regulations governing employment in India. These laws govern everything from the setting up of an establishment, to hiring and firing of employees, working hours, days off, employee benefits, wages, pensions and gratuities. Labour being a “concurrent” subject in our quasi-federal constitution, both centre and state have the right to legislate on the subject and have both used this right liberally, leading to a maze of overlapping (and sometimes conflicting) rules, regulations, compliance requirements and regulatory authorities.

This is not to suggest that employees get a good deal at the expense of the employers. For all its octopus-like tentacles, Indian labour regulations are more honoured in the breach than in the observance. Employers of all sizes employ legal, semi-legal and often plain illegal methods to circumvent regulations, rendering much of the popular analysis (including World Bank’s “Doing Business” reports) on the subject, which are based on what the laws state on paper, inaccurate at best and completely useless at worst.

This disparity between a needlessly complex and potentially employer-unfriendly regime on paper and a deeply exploitative and definitely employee-unfriendly regime in practice needs to be kept in mind while evaluating labour law reforms in India.

Hire and fire

There is a widespread perception that restrictions on the ability to hire and fire at will have had a severe impact on the generation of employment and consequent economic growth. The Industrial Disputes Act, 1947 in Chapter V-B states that any industry (and industry is defined broadly enough to include even software companies, as per a recent judgment) that employees more than a 100 people needs to get permission from the government for lay-offs, retrenchment and closure. On the face of it this does look like a potentially serious restriction on the freedom of the employer to scale up or down, and consequently on the growth of industry, but several studies have shown that:

  1. Chapter V-B only applies to about 2.4 per cent of employees in India, since the vast majority of workers in the country are in the unorganised sector, and much of the rest are in firms smaller than the stipulated 100-people figure.
  2. Even when Chapter V-B applies, there’s no real bar to firing someone, given the redressal mechanism. The workman is fired in any case, citing any number of reasons, and disputes in this regard can take up to 8 years and beyond to be resolved. Broad-based studies have shown that Chapter V-B has not been a significant impediment to hiring and firing in practice.
  3. The economic impact of Chapter V-B is overstated. For instance, in the garment sector it is claimed that the lack of flexibility to hire and fire at will is the greatest impediment to growth. However, statistics show that 92 per cent of garment firms employ 8 or fewer people, suggesting that factors other than the ability to hire and fire are of much greater significance.
  4. Companies use contract labour whenever they require flexibility. An average of 25 per cent of all employees and upto 50 per cent of employees in establishments that have more than 5000 employees are contract labour. These workers are often paid much less than regular workers, are not entitled to benefits, and are hired and fired at will. The widespread use of such practice was one of the primary reasons for severe labour unrest at the Maruti, Manesar in 2012. The Contract Labour Act, 1970, that seeks to restrict and regulate such practices, appears to hold no ground in practice.

This is not to say that reforms are not needed. Greater flexibility for employers when it comes to scaling their operations is likely to improve employment prospects and encourage investment. However, this imperative needs to be balanced by the needs of the workers. The National Commission on Labour, 2002, which examined this issue, explains (check page 304) that if there is a transformation to a system where an employer has the freedom to hire and fire at will, then it has to be preceded, among other things, by “ i) the evolution of a system of constant upgradation of employability through training in a wide spectrum of multiple skills; ii) the setting-up of a system of social security that includes unemployment insurance and provisions for medical facilities; and iii) the institution of a mandatory system of two contracts – one, an individual contract and two, a collective contract with a workers union.”

Trade Unions

This brings us to the next big-ticket issue. Trade unions have been painted villainous by the media, and the bogey of “militant unionism” is often cited as the reason why unions are, if not outright evil, at the very least an unnecessary “market distortion”.

It only takes a dispassionate analysis of history and current events to understand that this is far from the truth. Historically, it has been trade unions that have fought for legislation that protects workers’ health and safety, ensures good working conditions, provides for a living wage, regulates working hours, combats discrimination and prevents various forms of exploitation.

It is self-evident that employers hold a far superior bargaining position when it comes to employees and trade unions, and collective bargaining is the only way in which this disparity can be bridged to some limited extent. This difference in bargaining power is succinctly explained by Adam Smith while referring to wage disputes:

“In all such disputes, the masters can hold out much longer. A (master) though they did not employ a single workman, could generally live a year or two upon the stocks, which they have already acquired. Many workmen could not subsist a week, few could subsist a month, and scarce any a year, without employment. In the long run, the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate.

We rarely hear, it has been said, of the combination of masters, though frequently of those of workmen. But whoever imagines, upon this account that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labor above their actual rate.

As far as militant unionism being a drag on productivity goes, data available shows that in the period of 1999 to 2008, more than double the number of man hours have been lost due to lockouts (a labour dispute initiated by management) as compared to strikes, suggesting that it is the employers that have been a greater cause of productivity loss than the employees.

It’s also worth considering here that, in the recent past, a combination of circumstances, both internal and external, have worked to undermine the efficacy of trade unions. Amendments to legislations such that it is now easier for outsiders to control unions (permitting political parties and even the management to hijack unions) is one of these reasons. The gradual change in the ideology of the Supreme Court from being pro-employee to pro-employer has also resulted in a series of judgments where workers’ rights to collective bargaining have been undermined.

Any reworking of labour laws would have to have trade unions and collective bargaining at their core, with provisions to prevent, to the extent possible, hijack of unions by political parties and management itself. A genuine collective bargaining framework where workers interests are fairly represented would benefit both employees and employers.

Minimum Wage and Standards

Another essential step for a holistic rejig of labour law regime would be to set up minimum standards that would be applicable across industries and types of establishments. In its current form, the various labour laws and regulations in India combine to leave a vast number of labourers outside their ambit and the protections offered. Domestic workers, like housemaids, have no employee protection; the same extends to casual workers, for example those who work at roadside tea-stalls and restaurants, who have no contract of employment.

A common legislation to ensure a basic minimum wage, minimum health and safety standards, basic safeguards against exploitation and discrimination and basic benefits such as maternity leave would go a great way towards preventing exploitation of workers across sectors.

The Union Government had proposed a mandatory “national floor level minimum wage”. It currently exists as a recommendation that is non-mandatory for states. State minimum wages are as low as Rs. 38 per day for tea plantation workers in Tripura. Although the proposed wage is a meager Rs. 115 per day, industry lobbies and industry-friendly commentators have been up-in-arms against it, stating that local conditions would need to be considered, ignoring the fact that there is virtually no part of India where even Rs. 115 per day would actually amount to a living wage for even a single individual, let alone a family of four.

For a casual comparison, the US is debating a minimum wage of $10 an hour, which works out to about 44 times the minimum wage that India is discussing, whereas the cost of the living in the US is only between 2 to 4 times as expensive as India, using numbers from and


The other main failing of the Indian labour regime is enforcement. As with many other policies in the country, poor-to-zero enforcement means that while employers continue to suffer the bureaucracy, employees continue to be grossly underpaid and exploited. Admittedly, a legal regime of this level of complexity and internal inconsistencies is difficult to enforce, even at the best of times. Add corruption to this mix and it’s plain to see why an elaborate and strict labour regime co-exists with deplorable conditions for labour. Overhauling and simplifying the labour regime should also be accompanied with a renewed thrust on enforcement, to make sure that the system works in practice.


It’s virtually without debate that the Indian labour law regime requires a comprehensive overhaul. Central and state legislations need to be examined in totality to understand how permissions and compliances required can be made as few and as simple as possible, without adversely affecting rights of workers.

While it is desirable to move to a system where workers can be employed on negotiated terms and where the distinction between permanent and contract employees is entirely dissolved, there are three levels of protection that would need to be in place before that happens:

  1. A national legislation on minimum wages and standards, so that under no circumstance can a worker (in a factory, service company, household or tea-shop) be employed at standards inferior to that.
  2. Sanctity for collective bargaining agreements, so that the overwhelmingly superior bargaining position of the employer over individual employees does not lead to exploitative terms of employment; and
  3. Social security measures such as unemployment insurance and retraining facilities, so that loss of employment does not mean that a worker has to starve.

Once a simplified regime incorporating these safeguards comes into effect, the enforcement of these provisions will also be considerably easier and less expensive.

The author can be contacted on Twitter @vinayaravind


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